Fast on the heels of all the bullish economic news that closed 2004, the University of Michigan survey of consumer sentiment takes a dip to start the new year. From Bloomberg:
U.S. consumer confidence unexpectedly dropped for the first time in three months in early January as stock prices fell, a private report today showed.
The University of Michigan's preliminary consumer sentiment index for the month decreased to 95.8 from 97.1 in December. The decline reflected falling optimism about the current state/future course of the economy.
Consumers also may be strapped after going on a buying binge in the second half of 2004 that left them with the lowest savings rate ever. Falling stock prices and the prospect of more interest rate increases by the Federal Reserve may damp their enthusiasm and cause spending to slow early this year.
"Without another wave of euphoria, rising interest rates, low savings rates and high debt service ratios should keep consumer spending growth restrained at the start of 2005,'' Sheryl King, a senior economist at Merrill Lynch & Co. in New York, said in a report.
This is worth remembering:
The level of confidence itself may not influence spending. Confidence does reflect changes in economic conditions, including employment and income, that influence purchases.
As is this, from FXSTREET.com:
...economists were cautious to read too much into the drop.
"It's hard to tell whether consumers are feeling better or worse, and I'm not sure that they know themselves," said Steve Stanley, chief economist at RBS Greenwich Capital.
He noted that confidence had jumped in December from a reading 92.8 in November.
"December's jump in the Michigan gauge looked promising, but the small decline in sentiment in early January suggests that attitudes remain in the extraordinarily narrow range that has prevailed since last January," Stanley said.
The January index was dragged down by the expectations index, which fell to 86.4 from 90.9 in the previous month.
That the sentiment index was driven down by the expectations part of the survey may suggest some real anxiety that fundamentals in the economy are still not quite what they might be. What would those fundamentals be? Maybe its the hangover from the "buying binge" cited in the Bloomberg article. But I'd focus on this, from San Francisco Fed chief Janet Yellen (via the aforementioned Bloomberg link):
The average gain in non-farm payrolls last year of about 185,000 jobs a month ``is not a fantastic performance,'' Janet Yellen, president of the Federal Reserve Bank of San Francisco, said yesterday. Even so, she said, the U.S. economy is in a ``self- sustaining expansion'' and the labor market "is finally firming up.''
... and this conclusion from the last chapter of my round-up of Fed officials' forecasts for 2005:
Put it all together, and a pretty uniform opinion message emerges:... twin fiscal and current-account deficits that need to be watched...